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Page added on October 27, 2015

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U.S. Plans to Sell Down Strategic Oil Reserve to Raise Cash

Public Policy

The U.S. plans to sell millions of barrels of crude oil from its Strategic Petroleum Reserve from 2018 until 2025 under a budget deal reached on Monday night by the White House and top lawmakers from both parties.

The proposed sale, included in a bill posted on the White House website, equates to more than 8 percent of the 695 million barrels of reserves, held in four sites along the Gulf of Mexico coast. Sales are due to start in 2018 at an annual rate of 5 million barrels, rising to 10 million by 2023 and totaling 58 million barrels by the end of the period. The proceeds will be “deposited into the general fund of the Treasury,” according to the bill.

The sale is the second time the U.S. has raised cash from the reserve, created as a counter-balance to the power of Arab producers after the first oil crisis of 1973-74. The U.S. may sell also additional barrels to cover a $2 billion program from 2017 to 2020 to modernize the strategic reserve, including building new pipelines.

The White House on Tuesday urged lawmakers to support the budget deal, including the proposed partial sale of the SPR, saying it was “a responsible agreement that is paid for in a balanced way.”

Average Prices

Supporters of the sale argue the U.S. doesn’t require such a big emergency reserve as rising domestic production on the back of the shale boom offsets the need for imports. Critics, including oil analysts and former U.S. energy officials, say using the underground reserve as a piggy bank makes it less effective in meeting its intended purpose: combating a “severe energy disruption.” What’s more, the government would be selling at a time when oil is unlikely to have recovered from its slump over the past 18 months.

The Energy Department, which oversees the reserve, says on average the U.S. paid about $29.70 a barrel for the oil. But after adjusting for inflation and other items, the average cost rises to $74 a barrel, according to ClearView Energy Partners, a Washington-based energy research firm. On Tuesday, West Texas Intermediate, the U.S. oil benchmark, traded at less than $44 a barrel.

At current prices, the extra sales to fund the modernization of the strategic reserve would be equal to 45 million barrels and bring the draw-down to almost 15 percent of the total.

China Reserves

The draft bill states that “the age and condition” of the reserve “have diminished its value” as an energy-security asset, requiring its modernization. “Global oil markets and the location and amount of United States oil production and refining capacity have dramatically changed in the 40 years since the establishment of the Strategic Petroleum Reserve,” it said.

The sale comes as countries including China and India build their own reserves, buying crude in the market to fill up huge tank facilities. The International Energy Agency estimates that China has already stockpiled 200 million barrels and will add nearly 20 million more this year. Beijing plans to increase the size of its reserve to 500 million by 2020. Germany, Japan, South Korea, France, Spain, Italy and other big importers also have their own strategic oil reserves.

Washington has released crude from the strategic reserve three times in supply emergencies: in 1991 during the Gulf War to liberate Kuwait from Iraq, in 2005 after hurricane Katrina crippled Gulf of Mexico production, and in 2011 after the war in Libya cut supplies. Between 1996 and 1997, Washington also sold 28 million barrels to reduce the federal deficit.

The U.S. imported 9.5 million barrels of crude a day in July — the latest monthly data available — down 35 percent from a record of 14.7 million in August 2006.

The Bipartisan Budget Act of 2015 will extend the government’s borrowing authority until March 2017 and also include a two-year deal on spending, party aides said.

bloomberg



20 Comments on "U.S. Plans to Sell Down Strategic Oil Reserve to Raise Cash"

  1. paulo1 on Tue, 27th Oct 2015 11:07 am 

    Let’s hope they get more than they paid for it!!

    Talk about short sighted planning. ‘They’ must be getting desperate.

  2. penury on Tue, 27th Oct 2015 12:12 pm 

    Of course they are desper4ate paulo, when you have seven wars to fight, plus two or three proxy wars that you must fund, plus providing arms to both sides of the wars, your need for money is never ending. 20 trillion in debt? No problem, the world knows we are good for it. Mainly because the debt is all bought by the Fed, at zero interest, Ain’t it wonderful to be the Master of the Universe?

  3. frankthetank on Tue, 27th Oct 2015 1:09 pm 

    Not enough..the thing will be empty by 2023…

  4. HARM on Tue, 27th Oct 2015 1:11 pm 

    Idiocy. Buy high and sell low. All to pay for current (over)consumption. Just what I’d expect from Congress.

  5. frankthetank on Tue, 27th Oct 2015 5:28 pm 

    2022—Supreme Chancellor Hillary Clinton …by decree …will guarantee all gasoline not rise above the $2.oo per gallon … emptying all petroleum reserves.

  6. makati1 on Tue, 27th Oct 2015 8:47 pm 

    The end is near…

  7. ghung on Tue, 27th Oct 2015 10:03 pm 

    It’s chump change; a few billion dollars.

  8. makati1 on Wed, 28th Oct 2015 3:17 am 

    What’s next at the Imperial yard sale? The National parks? The Smithsonian? Washington Monument? We shall see.

  9. rockman on Wed, 28th Oct 2015 6:13 am 

    Frank – “2022—Supreme Chancellor Hillary Clinton …by decree ” She might want to try but executive orders cannot override Congressional laws. One has to go back to the days when they passed the SPR rules. they are very restrictive and vey clear. Different times I suppose: the congress critters went to great length to keep the SPR from becoming a political football. For instance it clearly says the SPR cannot be used to manipulate prices other then to the extent in can be drawn down to alleviate a shortage. IOW if imports are available (at whatever price) the SPR cannot be tapped.

  10. Davy on Wed, 28th Oct 2015 12:48 pm 

    “Crude “Tipping Point” Arrives: China Runs Out Of Space To Store Oil”

    http://www.zerohedge.com/news/2015-10-28/crude-tipping-point-arrives-china-runs-out-space-store-oil

    “And just like that China has, if only for the time being, run out of storage facilities.

    How long until this translates into an actual drop in oil purchases, and even more importantly, how long until the U.S. itself finds itself in a comparable “overflow” bottleneck, leading to the next, and sharpest yet, drop in oil prices?”

  11. Revi on Wed, 28th Oct 2015 12:55 pm 

    Un – freaking – believable!

    How stupid are we? Could we pick a worse time to sell? And a worse thing to sell it for?

    Do they have any clue at all what’s going on?

    What is the plan?

  12. Jersey Patriot on Wed, 28th Oct 2015 1:39 pm 

    Bizarre. At the all-time high of $147/bbl., 58 million barrels is $8.5 billion. Over the 8 year period, the US government will look to spend at least $35 trillion.

    8.5/35,000 is about 0.02%. This isn’t even a rounding error in the federal budget.

  13. rockman on Wed, 28th Oct 2015 2:48 pm 

    The new budget deal: it would appear they’ve gotten Congress to agree to modify the law governing the SPR.

    “Strategic Petroleum Preserve. Requires the sale of 58 million barrels of oil from the Strategic Petroleum Reserve. $6.5 billion” But no details yet. For instance are they going to repeal that portion of the law that requires the feds to replace the oil in a timely manner?

    So how will this impact our “energy independence” effort? The volume represents about 8% of the inventory. Which would cut our security blanket from 137 days to 126 days. IOW we lose 11 days of substitution. And again the details are missing: current law allows only 30 million bbls/month to be withdrawn…I mm bopd.

    As far as what US citizens have paid for the SPR oil: that $29/bbl is bullsh*t as proven by the govt’s own numbers. From the DOE: “Investment to date – About $27.8 billion ($7 billion for facilities based on replacement value; $20.8 billion for crude oil based on accounting value).”

    I’m not even sure the “accounting value number isn’t cooked a bit (i.e. – did they take into account the interest the govt has paid on the bonds used to cover our deficits?) But let’s accept it for now. So the oil in the reserve has cost the tax payer $68/bbl…at a minimum. Granted the facilities aren’t disappearing but it doesn’t change the fact that we have more than twice as much invested in our security blanket as the $29.70/bbl number would imply.

    Of course if Congress is playing a little loose with the actual law it won’t be a surprise to see a few lawsuits pop up. And then there the obvious: when the citizens/govt starts to worry about future oil supplies they might want to replace those 58 million bbls. And what would make them nervous: increasing oil prices which would logically mean a higher price would be paid for that replacement then we’ll get by selling it in a couple of years.

    And the effect of global oil supplies? Let’s say then dump the oil over a 12 month period. Based upon current global consumption those 58 million bbls would add a whopping 0.017% to the global supply that year. I doubt the KSA will feel much pain. LOL.

  14. peakyeast on Wed, 28th Oct 2015 3:17 pm 

    I have to agree with Revi…

    Could they have picked a worse timing?

    If there is a plan – it must be to drive prices down. Especially with the chinese storages filled up and a slumping world economy.

    To me it looks like they are ready to collapse the oil production in order to revive the economy and demand for oil.

    IOW: The making of a world class rollercoaster ride.

  15. GregT on Wed, 28th Oct 2015 3:42 pm 

    “How stupid are we? Could we pick a worse time to sell?”

    We?

  16. peakyeast on Wed, 28th Oct 2015 3:49 pm 

    A quick look at this graph and it becomes apparent that if the selloff is to gain liquidity – the desperation must be absolutely complete.

    http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=10y

    You have to go back to a few select months in 2008/9 to find a worse time than selling today – again assuming its to get some quick money…

  17. ghung on Wed, 28th Oct 2015 4:13 pm 

    …again assuming its to get some quick money”

    According to Rock’s numbers, the entire sell-off would be less than one day of operating expenses for the Federal Government. This makes absolutely no sense at all. There isn’t an election looming soon, so saying it’s political doesn’t jive too well.

    Clearly, there’s something we aren’t being told. Money to fix potholes? Sure. I smell pork; vote buying.

  18. makati1 on Wed, 28th Oct 2015 7:25 pm 

    Maybe it’s to pay for these?

    “Pilots of new U.S. fighter jet to wear $400,000 helmets”

    “Like the plane, the helmet is enormously expensive. The cost of each custom-made helmet is more than $400,000. And like the plane, which is years behind schedule and millions over its original budget, the helmet has encountered problems.

    Earlier versions were jittery when the plane hit turbulence. There was a latency in the video, which caused pilots motion sickness. The night vision technology didn’t work as well as it should have. There was a “green glow” that obscured the pilots’ view. Things got so bad that in 2011 the Pentagon hired BAE Systems to build a back-up helmet in case the one in development couldn’t be rescued.”

    http://www.sfgate.com/nation/article/Pilots-of-new-U-S-fighter-jet-to-wear-400-000-6173210.php

    http://www.nydailynews.com/news/national/pilots-f-35-fighter-jet-400-000-helmets-article-1.2170857

    Only in America could an industry screw up for 14 years and spend over a trillion dollars and still be in business. Your tax dollars (oil reserves) at work.

  19. Davy on Wed, 28th Oct 2015 7:33 pm 

    Mak, I know it is hard but try to stay on topic for a clean board.

  20. Jeff on Wed, 28th Oct 2015 10:29 pm 

    The SPR is already empty… If you think that there are 695MM BBLs there, then you are in for a BIG surprise… & that surprise will be here before Thanksgiving…

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